mutual funds (MFs) have begun the New Year on a high note with plans to pay dividends to their investors in equity funds.

In an interview to CNBC-TV18, Harsh Roongta, apnapaisa.com shared his reading and outlook on dividends paid by mutual funds. He said, dividends paid by MFs and by a company are different. The money received by MFs is actually your own money because the exact amount given as dividend will be reduced from the net asset value (NAV).

“So, dividend as a reason to increase your exposure to equity funds I do not think is the correct reason“, he added.

Below is the edited transcript of his interview on CNBC-TV18

Q: Should investors increase their exposure to equity funds because mutual funds plan to pay dividends to their investors in equity funds?

A: Dividend from a mutual fund is a completely different kettle of fish from a dividend in a company. Dividend in a mutual fund is your own money coming back to you. The exact amount of dividend that is declared will be reduced from the Net Asset Value (NAV), so effectively your net wealth does not change.

Unlike a company, where the company declares dividend there is a certain inherent consistency that it is promising to the market that they will be able to maintain that dividend payout ratio. That clearly is not something that is applicable to mutual funds. So, dividend as a reason to increase your exposure to equity funds I do not think is the correct reason.

There are on the other hand funds that specialize in high dividend yielding companies, which have done quite well.You can increase exposure to those funds if you think that dividend yielding companies are a good investment and you do not want the trouble of finding them out individually. Then you can have a portfolio manager or a mutual fund manager who will invest that on your behalf.

Q: Can you explain the concept of equity and derivative fund, and is it suitable for conservative investors?

A: Derivative fund is essentially what is colloquially referred to as an arbitrage fund. What they essentially do is that you buy in cash. The simplest strategy they employs is that it buys in the cash market and sells in the Futures market. The difference between the two is actually an interest. Although they are buying and selling equity in the Future, the difference is interest. Essentially, you are actually getting interest from buying and selling equity and therefore the arbitrage funds are comparable to a liquid fund or an ultra short-term fund.

If you look at the category returns there clearly they have done slightly better than the ultra short-term fund but definitely better than the liquid fund. There are certain tax advantages that the arbitrage funds have simply because the securities that they invest in are equities.

However, one must realize that arbitrage funds might have higher exit loads as compared to a liquid fund or even as compared to an ultra short-term fund. So, you have to weigh the two. The tax advantages if at all you have it vis-à-vis the extra exit load. So if your period of holding is likely to be higher and you are likely to enjoy tax advantage then possibly an arbitrage fund is probably a better investment than an ultra short-term fund.

Q: If I do direct access to any of these arbitrage funds will I be rid of the exit load?

A: The exit load is not connected to this direct plan issue that you are raising. That will be applicable whether you apply in the direct plan or whether you have applied through a distributor.